Gearing up: A strong production base awaits its comeback

Going off an already established production base, international players are expanding their local presence. In a large market with low levels of vehicle ownership, Egypt’s automotive industry is promising. Although sales suffered in 2011 due to the revolution and economic slowdown, sector leaders are confident that signs of recovery in 2012 will soon develop into full-blown growth, thanks to strong sector foundations.

MARKET HIT: Egypt turned out 81,731 vehicles in 2011, of which 53,072 were passenger cars and 28,659 commercial vehicles, according to the International Organisation of Motor Vehicle Manufacturers. Overall output dropped by 30%, and vehicle sales also fell 30%, to 176,157 units, according to Egypt’s Automotive Marketing Information Council (AMIC). Passenger car sales fell by a third to 133,165, with high-end brands hit the hardest. A report by Beltone Financial, a financial services firm with offices in the Middle East, said that during the political turbulence of 2011, “buyers preferred to keep away from the higher-end categories”.

Automakers in the low- to middle-price segment fared better, though they experienced substantial overall sales declines. Ghabbour Auto (GB) sold 42,924 units, down 19% on 2010. The largest independent car assembler in the Middle East, GB Auto assembles, imports and distributes vehicles from international player such as Hyundai. Nearly 25% of all new cars sold in Egypt in 2011 were produced by GB Auto, and in 2012 the firm increased its market share to 32%, up from 28% in 2011. Sales of motorcycles and tuk-tuks (auto rickshaws) also supported its profits that year.

Several factors explain the sharp drop in 2011. Consumers and businesses seemed to defer big-ticket purchases like vehicles during the political upheavals that began in January of the year, waiting for signs of a more secure climate. A fall in economic growth to around 1.8% in 2011, according to the IMF, led by a 4.3% contraction in the first quarter (official figures), also cooled demand. Both factors increased banks’ caution towards lending, which is likely to have affected automotive finance. The weakening of the Egyptian pound also had an effect, driving up the price of imports, which account for over half the vehicles sold.

BOUNCING BACK: Vehicle sales are expected to resume their growth trend as economic and political stability return. With low levels of car ownership (30 units per 1000 people, compared to 109 in Algeria and 128 in China, according to GB Auto), the scope for expansion is considerable, particularly if restored economic growth leads to increases in real incomes.

Signs of recovery were showing in spring 2012, with sales up 4.4% in May on the same month of the previous year, according to AMIC. Of the 15,465 units sold, two-thirds were passenger cars, but sales in this category continued to slide, down 2.8% on May 2011. Overall volume growth was driven by commercial vehicles, as sales of buses and trucks rose 30.7% and 29.6%, respectively. “The lack of consumer confidence right now is the biggest problem the industry is having,” Hassan Aboul Fotouh, the chairman and CEO of local automobile firm AF Auto, told OBG.

Khaled Youssef, head of the automotive division at Egyptian International Motors, agreed that improving consumer confidence is crucial for the sector. “This will be critical to getting the automotive sector back on track. With a population of 85m and only a small portion owning cars, the potential for growth is vast,” he said.

Industry leaders are hopeful that possible changes to the tax code as discussed by the interim government in the first half of 2012 might be implemented by its full-time successor, reducing the burden on low- to middle-income groups. Mena Sadek, GB Auto’s corporate finance and investments director, told the international press that most new car buyers earn around LE3000 to LE5000 ($502.11-836.85) per month and pay for vehicles in instalment schemes, making demand quite sensitive to changes in disposable income.

TAX & TARIFF: Tariffs have strongly shaped the industry, with high charges on imported vehicles to protect the local industry and provide revenue for the state. Passenger cars with engines of less than 1600 cubic centimetres (cc) are subject to an import tariff of 40%. Those with 1600 cc or more face a hefty levy of 135%, with an additional escalating sales tax, according to the office of the US Trade Representative. This has encouraged some international carmakers to set up production facilities in Egypt rather than rely on imports.

Under its obligations as a signatory to the World Trade Organisation’s General Agreement on Tariffs and Trade, Egypt must reduce its tariffs to 40% or less in the medium term, and a number of discussions are under way with the EU to lower bilateral tariffs, with 10% reductions every year.

Tariff cuts may not have as great an impact on domestic manufacturing as some fear, as the industry produces a wide range of competitively priced vehicles. While the market share of domestically produced brands may be expected to decline in the longer term as imports become cheaper, the market’s potential suggests that there will still be room to grow.

SUPPLY CHAIN: Of greater concern is the fall in the Egyptian pound. While this has been less steep in 2011 and 2012 than expected, it has affected carmakers, which tend to import a significant portion of inputs. As a result of the tariff structure, many automakers in Egypt assemble units from complete knockdown kits (CKDs). CKDs are full car kits manufactured abroad and then exported to a second country for assembly. CKDs are particularly common in emerging markets, as they give the manufacturer more control over production and quality of the finished product while at the same time avoiding tariffs on importing vehicles.

The components industry was valued at $1.3bn in 2010, according to the Engineering Export Council of Egypt. General Motors and Mercedes are among the biggest components manufacturers in Egypt, and domestic demand accounts for 70% of revenues. Components firms are also increasingly turning to overseas markets, particularly to the EU, where 90% of exports are shipped. Parts firms can leverage the competitive advantages of Egyptian industrial exporters, including geographical location, low labour costs and overheads, government support and favourable trade terms.

FUELLING UP: Automakers are gearing up for future growth. In February 2012 GB Auto announced it would begin assembling and distributing vehicles for China’s Geely, which owns Volvo’s passenger cars, in the fourth quarter, launching Geely’s presence in the Egyptian market. In July of that year, GM began producing its Chevrolet Move passenger minivan in its new $10m factory on the outskirts of Cairo.

With Egypt’s political and economic recovery already under way in the second half of 2012, revival in the domestic automotive market is expected to pick up pace. Longer-term prospects for growth are excellent, and local manufacturers are in a good position to tap into rising demand both at home and in export markets, leveraging several competitive advantages.